Net income at the HSBC Holdings Plc (HSBA) unit climbed to HK$9.3
billion ($1.2 billion) from HK$8.16 billion a year earlier, Hong
Kong’s second-largest bank said in an exchange filing yesterday.
The net interest margin, a measure of lending profitability,
widened to 1.85 percent from 1.75 percent a year earlier.

Hang Seng Chief Executive Officer Rose Lee increased
mortgages, credit card issuance and corporate lending in Hong
Kong, while adding mainland clients with cross-border products
and services as China encourages expansion of the offshore-yuan
market. Competition for deposits will weigh on lending margins
for the rest of the year, she said yesterday.

“Performance in the first half was better than expected
but there are challenges in the second half,” said Ronald Wan,
a Hong Kong-based managing director at China Merchants
Securities Co., citing the fight for yuan deposits. “China’s
economic slowdown will also affect Hang Seng (HSI)’s earnings as its
operations in China are likely to report slower growth.”

The lender’s first-half profit beat the HK$8.26 billion
average estimate of seven analysts surveyed by Bloomberg News.
Its shares rose 0.7 percent at 1:40 p.m., bringing its gain this
year to 18 percent.

HSBC Climbs

HSBC rose 1.3 percent in Hong Kong trading, while the
benchmark Hang Seng stock index advanced 1.1 percent. Hang
Seng’s London-based parent reported an 8.3 percent drop in
profit and said it would set aside $2 billion more to cover
fines and lawsuits.

“There will be pressures on net interest margin in the
second half in terms of deposits,” Lee told reporters in Hong
Kong. “Banks’ competition for yuan deposits is particularly
intense because of the increase of cross-border lending demand,
pushing up yuan deposit rates.”

Loan profitability of Hong Kong banks has fallen for five
consecutive years, spurring lenders to seek revenue growth from
China-related business by expanding their presence on the
mainland and offering yuan services at home.

“Loan growth will remain slow due to slow economic
activity,” Patrick Pong and Stanley Li of Mirae Asset
Securities Securities (HK) Ltd. wrote in a note to clients. “We
expect the bank’s net interest margin to stabilize as scope for
further drops in funding costs looks limited.”

Margins Narrow

The average net interest margin of Hong Kong retail lenders
narrowed to 1.25 percent last year from 1.87 percent in 2007,
the Hong Kong Monetary Authority said in its annual reports. The
margin of BOC Hong Kong (Holdings) Ltd. (2388), the largest Hong Kong-
based lender, narrowed by 17 basis points last year to 1.32
percent. Bank of East Asia Ltd., the city’s largest family-run
lender, also saw its margin squeezed by 3 basis points to 1.75
percent.

Bank of East Asia will publish its first-half earnings Aug.
2 while BOC Hong Kong, the local unit of Bank of China Ltd.,
will report in the week of Aug. 20.

The Hang Seng Finance Index, a subindex of the city’s
benchmark, has gained 5.6 percent this year, compared with 7.4
percent for the main Hang Seng Index.

Hang Seng Bank generated HK$2.47 billion of pretax profit
from its mainland China business in the first half of the year
to account for 23.1 percent of the total, compared with 18.3
percent a year ago, the bank said in a statement yesterday. Hang
Seng Bank started offering the world’s first yuan-denominated
gold exchanged-traded fund in February, the month Lee was
appointed.